Heritage Bank: A local player with global sights

This is the first anniversary of Heritage Bank. As the Managing Director, how would you describe the experience?

It’s been an exciting journey for us. At the beginning of our journey we had made certain projections based on how we intended to approach the market and we had various plans in place but events have not panned out quite the way we expected. As a result, along the line, we’ve had to make various adjustments to respond to changes in the environment.

For example, we had expected the credit performance of companies in the industry to have improved over the past year but contrary to expectations and based on our interaction with companies, it is evident that companies are still not performing as well as we had initially  projected.

This reality has made granting of credit to the sector a bit tricky and we have not been able to grow our asset book as much as we would have wished because judging from occurrences in the environment, we have had to be extra cautious. This turn of events has also had an impact on our projected income within the period, but of course, we take a long term view. We still have great confidence in the economy. So even though things haven’t turned out exactly the way we expected, we still have great hope for the future.

You are saying that there is so much confidence in the economy at this moment how really optimistic are you about the years ahead?

Ghana is a country that has huge infrastructural needs, a youthful population which keeps increasing on the average by 100,000 each year, judging by the sheer number of graduates that our tertiary institutions keep churning out.

But with limited growth opportunities or job opportunities in the public sector, it is a given that more individuals will be compelled to move into private enterprises. This turn of events  is bound to lead to a massive explosion of private sector activities thereby serving as an engine or stimulus of growth for the economy. So even though we are currently going through some challenges in terms of graduate unemployment, in the long term, it is going to be in the interest of the country.

It is heart-warming to note that a few educational institutions have already identified this trend and are preparing the next generation to champion it. For instance, when you look at a typical graduate from Ashesi University, they tend to be entrepreneurial in their outlook when they complete school; they’re not necessarily looking for an office job, rather they are looking for opportunities to create value or solve unique problems in society at a profit. Once we have more graduates adopting that mind-set and  migrating to that space, the economy is going to sky-rocket.

In this respect, I see the role of the government as the creator of the required enabling environment in terms of tax regimes and social interventions.

You are a year old, and the experience has been exciting. Do share some pointers for the next five years?

In our first year we have succeeded in putting together a strong workforce which is made up of a team of dedicated employees, committed to our vision of building a world class bank.

We’ve also succeeded in putting in place world-class systems. We’ve also set up outlets which will, in essence, help to promote our brands and provide access to persons who want or need physical access to our branches for certain transactions. Currently, we have 7 branches and by the end of this year we are looking at a total of at least  11 branches. Even though our primary modus operandi is to leverage on digital products to provide access to financial services for customers, Ghana is still a predominantly cash driven society and therefore we have to strike the right balance.

As a business, our primary focus is on small and medium scale enterprises as well as local corporates. So even as we roll out our digital products we want to reach out to places where we have intense commercial activity, where persons need access to banks.  With this in mind, we are already establishing a presence in Abossey-Okai, Accra Newtown and Nima market. In the future we will be expanding our reach to Kasoa, Haatso, and Madina.

In terms of accessing our customers, we are going to  leverage heavily on our digital products to reach places like Sunyani, Takoradi, Tarkwa and others. We will also be rolling out products which address the specific needs of these areas. In fact, we have already started doing business with people in these areas through the magic of digital banking and it is working out smoothly.

Our short term goal is to become a medium-sized bank by leveraging technology to serve our customers dotted across the nation. With this objective, you are  going to see us coming out with structured and customised technology-centric products for different segments of the market. We may be offering a particular product in Swedru whose characteristics would be markedly different from its iteration that is being offered in Paga.

You have talked a lot about structured products for specific sectors of the economy or specific group of people. Please share some specifics of such packages or products and services that have rolled out?

In Suame, we are dealing with the vehicle spare part dealers through its umbrella body. What we have done is to create a facility whereby you apply through the association of spare parts dealers and the association itself serves as the guarantee. That product is unique to the Suame branch and cannot be found anywhere else. In the Airport branch, for example, we don’t offer such a facility; we have a different product suite due to the location and the kind of business that goes on there. With a community-development agenda as a core aspect of our business ethos, what we do is to look at growing the economy one transaction at a time.

So the approach we are adapting is that whatever financial transaction you are carrying out, how can we make it easier for you? In the new localities that we will be delving into, it is this same approach that we will adopt.

Stated capital, support for local banks and foreign ownership

The Central Bank is adamant on not extending the deadline for banks who might not be able to meet the GH¢400million stated capital by December, 2018. What plans do you have in place to meeting the deadline?

We have firm plans to be ready by the defined deadline which is December 2018. We are far advanced in discussions with shareholders and other investors. Currently we have a stated capital of GH¢130million and our current shareholders will put up GH¢100million, then the rest will come from foreign investors. As we speak, we have narrowed down a pool of interested investors and negotiations are far advanced. You can expect an announcement soon, well before BOG’s stipulated December 2018 deadline.

Several local banks are looking at foreign investors to meet the required capital. This means the banking sectors gets deeper and deeper into foreign hands. Is that good for this economy?

The mere ownership of banks by foreign institutions is not necessarily the problem. It’s the business focus and strategy of the foreign owners that needs to be looked at. For example, if I have a foreign part owner and at the end of the period the individual or institution receives the dividends and repatriates everything, then that presents a problem. It would then mean that a 100percent local ownership would have retained the dividend here, reinvested it in the business and created more jobs.

Having said that, depending on the type of foreign owner you have, the outcomes can also be different. If your foreign partner is another bank, then you can benefit from their technical expertise, they can  help you develop new products, and provide technical assistance to your team. So there are some benefits to be derived from having foreign banks as partners.

But if we are looking at individual investors who are only interested in the return on their investments, then generally that may not necessarily be in our best interest. However, consider the scenario of a local bank which is unable to undertake certain transactions because of the size of the balance sheet and you have a foreign investor coming in and because of that your balance sheet becomes bigger which helps you tap into certain transactions. Sometimes it may turn out that 100percent of a small pie maybe less than or 60percent of a much bigger pie.

You have to look at the nuances; like the strategy of the foreign investor who is coming, whether the person/institution has a long or short-term view. Ultimately, some foreign participation in the banking industry is good but it will be useful to have some pure indigenous banks whose strategy will be aligned towards the developmental needs of the country.

The fact is some of these indigenous banks have social objectives. Foreign oriented banks may be content to just stay in Accra and we’ve seen examples of this happening but these local banks go into the hinterlands to serve the indigenes.

Do you believe in the assertion that no country has developed the way it wants to develop with foreigners at the helm?

There is something to be gained from interacting with the outside world. Like I said there are countries that are much more developed than us when it comes to banking and economic practices. To make the foreign participation useful and beneficial to the country, I think the government has a role to play in terms of the kind of policies put in place.

These policies must ensure that different sectors of the economy receive the necessary attention. We have an EXIM bank who give subsidized loans to commercial banks who then on-lend to farmers. In doing so, you are encouraging commercial banks to devote part of their loan portfolio to the agric sector.

The policies that are adopted up there will therefore influence where banks deploy their capital or their funds. What happens is that whether or not you have a foreigner at the helm of affairs, government will still be able to direct how resources should be deployed in the economy.

Do you believe that there are too many banks in Ghana? Would you call for more consolidations in the industry?

As a customer of banks, the more banks there are, the greater the competition, which means I will be able to get cheaper facilities. So in the eyes of the customers, they will be excited to see all the competition but that only applies to some segments of customers. There may be some other customers who undertake big transactions and get frustrated that the banks are unable to fund their projects or transactions. Such category of customers, of course, will be happy to see some kind of consolidation that produce banks with bigger balance sheets.

And then also from the side of the regulator, the bigger you are, hopefully, the less likely you are to fail because you have more capital which will protect you from losses and this will probably make their supervision easier compared to having a myriad of these smaller banks.

Some customers will be happy and if the objective is to address the needs of customers then maybe the competition out there is good.

But I do not think anyone should be compelled to merge because mergers are fraught with all kinds of challenges. Sometimes mergers do not succeed because there is a clash of cultures, different systems, strategic objectives and so on.

By and large though, the initiative to raise the stated capital to GH¢400million is a laudable one because most of our banks are not well capitalised. So it’s important that we get banks to increase their capital. In terms of the number of banks, I will not fuss over the number of banks because even if all the banks were to raise the GH¢400 million, I believe that the economy would be able to absorb that capital. In fact, it would generally augur well for the economy were that to happen.

The indigenous banks feel that they are not getting the needed support to push them further to do more for this economy, what should be done to give the assurance to these indigenous banks?

We all know that deposits are the lifeblood of a bank. I don’t understand why the government cannot put in place some policies to ensure that a certain guaranteed percentage of government deposits are deployed through indigenous banks. When you look at these big foreign banks, over 90percent of their deposit base comes from these low cost deposits. Consequently their cost of funds is much lower than indigenous banks. Which then, invariably, pushes up your base rate.

Now the central bank says that you cannot lend below your base rate. Even if I want to help the customer out, the central bank is telling me that I cannot lend below 30percent, simply because my base rate is 31percent. I mean you see government allocating about GH¢1billion for projects in the country. These funds have to be deployed through the banking system. If it’s coming from my government, why should the monies go through foreign banks and not through indigenous banks?

There are all these contracts which have to be financed, if it’s a government project, why should the funding not come from indigenous banks to ensure that we generate some revenue? There are so many areas that the government can make the environment friendlier towards indigenous banks without necessarily pushing the foreign banks out of the market.

Education and entrepreneurship

In Ashesi University, it is a deliberate attempt to get students oriented in such a way that when they step out they should not look for white collar jobs but create their own, shouldn’t that become a national policy?

We need different kinds of interventions to bring about that shift. One will of course be the design of our educational system. Secondly, we have a lot of people going to school outside the country and coming back. So we expect some of these guys coming back to serve as change agents.

Now in terms of a deliberate shift in the educational policy, the government can only do so much in terms of policies. Policies talk about what ought to be done, how to do it, and then the implementation of the policies. When you look at the American educational system, some of the lecturers that they have are successful businessmen who come in and then impact they are experiences, meanwhile, in Ghana, the system is purely academic.

We are gradually changing because today, students start businesses in school. I think what government needs to do is to  intervene from time to time in terms of policies that will cut down red tape and make it easier for people to start businesses.

In all these, what role should banks play?

You know in years gone by banks were seen as institutions which just garnered deposits and then on the basis of these deposits gave out loans and a few products. But that was a narrow definition of banking. At Heritage Bank, what we do is to oil the wheels of enterprises. If a customer out there needs to undertake some financial transaction, how do we facilitate such a transaction?

In the old definition of banking you would have sat in one location, waiting for people to bring deposits and extending loans to the people in that vicinity. But we have undertaken an initiative whereby, we facilitate financial transactions for individuals and businesses across the country irrespective of their location or whether we have a unit there or not.

We are giving facilities to government workers through the use of some of our digital projects. As a private enterprise, if you need financing or you need to pay for goods and services or you even need to get assistance from a bank to help in financial process within your entity, yes, we are ready to design such products.

Every year, 600,000 students write the BECE but only half of that number enters the senior high schools. When these 300,000 students graduate from SHS, just about a 100,000 find themselves in the tertiary institutions. What role can banks play to see almost everyone move from the basic school to the tertiary level?

There are two ways: directly and indirectly. Indirectly banks need to support private enterprises. If someone does not go to the university, it doesn’t mean such a person is a failure. Banks can extend credit to these people who have fantastic business ideas but lack capital. In some of these advanced countries, the focus is not particularly on what degree you have, it is more on what you can do. If I’m producing furniture, business is good, and I am training others, does it matter whether I have a degree or not? So if as banks we are able to support these private entities or enterprises that will help.

Secondly, it is a matter of not having enough educational facilities. Here too, banks can extend credit to entrepreneurs who want to venture into the educational sector so that we can absorb all these other students who couldn’t make it to the next level due to the lack of space in the current institutions.

The role that banks have to play is that first of all, they have to support existing private enterprises and then support start-ups. This means that we also need to look at our credit policies. We can urge these informal sector businesses to form cooperatives and use that extend credit to them. Because these are risky parts of the economy but you can practice appropriately.

Banks do have a big role to play. That is why I think the indigenous banks will do better than the foreign banks because the foreign banks, usually listed on stock exchanges in their home countries, are nervous when it comes to extending credit to these people. So even if their local management want to increase their exposure, they are not happy because they see it as an unknown territory and as risky. So, I think it’s the indigenous banks who are well-positioned to address some of these challenges.

Lending rates

Despite the consistent drop in inflation, policy rate and treasury bill rates, lending rates are still high. What needs to be done to drop the lending rates and how can banks contribute to a drop in the lending rates?

The lending rate is driven by a number of factors including cost of funds and the risk you put in place. In the past banks had access to funds from parastatal institutions, either through deposits or doing collections on their behalf and these were cheap funds. But that is not the situation anymore. At best, you can keep the money is for 24 hours and then they are moved elsewhere.

Access to cheap funds is becoming more and more difficult. These institutions are demanding, at least, Treasury bill rate plus 3percent. So the avenues for cheap funds are becoming more and more limited. Even for individuals who will open a current account and leave funds sitting in are also becoming very savvy and with the digital product they are able to move funds around easily. For us as banks, access to low-cost funds is becoming more and more difficult.

Then there is also the other perspective which is the risk premium. In an environment where you have NPLs at 20percent, that will influence the pricing of whatever loans you’re giving. It is also partly a culture problem. In some societies, it is a matter of disgrace if you’re seen to be in debt and you’re not paying. In Ghana we don’t have that kind of shame. So people come and take money and decide not to pay.

So the lending rate is not going to come down simply because the government says it should come down. A banking sector where NPL is at 10percent is an industry in crisis and so we are in bigger trouble at 20percent. Ideally it should be at 3percent.  If the expectation out there is that 20percent of loans that we give will default, then I need to factor that into my pricing.

Ghana Beyond Aid

Since Nana Addo Dankwa Akufo-Addo became president, one of his major policies is to create a Ghana Beyond Aid. From where you sit as a banker what can be done to attain a Ghana beyond aid?

Ghana Beyond Aid will suggest that we want to get to a stage where we produce enough to feed the people, produce enough to cloth the people and deliver social services without getting it from external assistance. Aid over a short term is not necessarily a bad thing if it is being invested into productive sectors of the economy as in to improve our capacity to produce.

But in getting to the point where do not need aid anymore, it all comes down to efficient management of the economy. If I spend more than what I earn I’ll need someone to help me. But if I can generate enough to take care of my needs, then I will no longer need aid.

In managing the economy efficiently, what it means is that we have to focus on quality information for decision making. If I have a clear decision on what my needs are, or what they are going to be in the future through surveys, then you’re able to plan. So for me the issue all comes back to planning because if you can plan and manage your economy effectively you will be able to project ahead and know exactly what your needs are.

For example, we say we want to build a factory in each district. Do we know how much it will cost, when such factories will start working, break-even and start making profits and the impact on such communities?

To wean us off aid is possible but we need a total framework overhaul. We need to re-orient the mind-set of the Ghanaian. We have a country that has a huge appetite for foreign goods and spending foreign currencies. Ghana beyond aid can be done, but it needs a little more planning and then a strong will and a concerted attitudinal change campaign to implement.

What is the role of banks in attaining a Ghana Beyond Aid?

We need to support people in the productive sectors of the economy. We should not just be looking at people who are buying and selling. If your contribution is helping us achieve food sufficiency, then banks can extend credit to you to do more of that.

The manufacturing sector, this is the sector that is producing and employing people, is a sector that we should be sending our investments into. As a country our focus must be on education, manufacturing and agriculture. In achieving self-sufficiency these are areas I think the banks should also focus on trying to assist the players in the sectors.

Would you want incentives to do more of that? Because then that would wean us off aid.

The government has to play its role in terms of providing the enabling environment. So the government needs to provide policies which will make it attractive for banks to operate in these fields. For example there are the issues of grants, tax breaks, other fiscal policies which will make it conducive for it to help players in that sector.

As a bank we have taken the initiative to produce core maths textbooks in support of Government’s free SHS initiative and together with the Ministry of Education we will distribute these to SHS students across the country. This is our contribution to aid in educating our young citizens so that in future they will become good leaders. In fact we have committed to provide five thousand books free of charge. Because the idea is that we want the people to be prepared for the future; a future where as a country we are self-sufficient.

When you take the agric sector, we are taking significant risk because we feel that this is the sector that we need to support. We’ve done a lot of cocoa guarantees during the last major cocoa buying season and then we have also provided significant loans to some people.

As we grow our balance sheet, manufacturing is something we are keenly looking at. We are keen on providing  support to this sector because funding for them is critical to the nation’s long-term economic growth.

Last words

Your last words, one year on?

We have achieved a lot in terms of putting in place the infrastructure for growth of the bank. We are confident about the prospects of the economy. We see Heritage Bank coming here to stay and helping our customers to achieve their dreams. We will be with them and we will make sure that their dreams become possible.

With a tagline ‘It is possible’, what do you mean?

We mean that whatever dreams you have we can help you to achieve that dream. We  exist to  make your dreams possible.

Managing Director of Heritage Bank Ghana, Mr. Patrick Fiscian